I decided to get back into side hustles in a big way this year. I wrote a book on options trading, a lucrative and fun side hustle. It took maybe 50 hours of writing and editing, plus a great cover designed by a Fiverr hustler. I hit the “publish” button in February and waited expectantly for the money to roll in. For the entire month I made….$2.01. Yuck! But there’s more to the story of how much this side hustle is worth.
Product-based side hustles, such as writing a book, can take a while to ramp up. However, they aren’t just about the current and past cash flows. They are just as much about the future cash flows that you don’t have to trade your time for ever again. These future cash flows can be given a capitalization rate, much like the sum of future cash flows of a stock can be calculated and discounted to get the current stock price.
Furthermore, both product and service side hustles can be viewed in terms of daily cash flows, which are the bricks that build the goal of your future financial independence.
Finally, side hustles open up opportunities for value intersections that can multiply the cash flows from your products and services. Similarly to a company making a bolt-on acquisition that has a synergy with the existing business model, so to can you take a product or service and amplify it with other side hustles. It’s difficult to put a capitalization multiple on something that is one good idea away from a 10X earnings increase.
Building Towards Your Goal
Our side hustles usually exist because we have a financial goal of some kind. The goal can be broken down many ways: how much money do I need per year, per month, or per day? How much do I need total that can then be used to purchase more income streams (money can be bought)?
I usually break down my income needs into a daily income goal for a side hustle. For example, my options trading brings in about $1,500 per month. That’s about $50 per day. My goal for all side hustles is to make $200 per day ($6,000 per month, $72,000 per year). That means I have 25% of my long term goal already accomplished.
Whether or not a side hustle is product or service based, whether its passive or active, it is still something created. When you achieve 50% or 5% or 1% of your goal in a repeatable and sustainable way, you have built something permanent.
Give a Mental Valuation to Your Side Hustle
If you know how much you can make with a side hustle, you can mentally capitalize how much your side hustle is worth. All income streams that can be purchased have a capitalization, or the multiple of earnings that an interested owner is willing to pay for the income.
I believe that the 4% rule is a good benchmark for capitalizing a side hustle. The 4% rule is from a study that showed that withdrawing 4% of a stock/bond portfolio yearly is sustainable in the long term. The corollary of the 4% rule is that for $1 of cash flow you need $25 of investments.
This is applicable to anyone with side hustles because it means that for every $1 you can sustainably and repeatedly generate from side hustles, you need $25 less in investments. I am not saying someone would pay you a 25X multiple to purchase your side hustle business. But I am saying it’s a useful mental model.
Look at it this way: if your goal is to generate $100 a day of job-free income, that’s $36,500 a year. That would require $912,500 invested in a mix of stock and bond index funds. But what if you had a mix of side hustles that reduced your reliance on investments? For example:
Now you’ve cut down the portion of income that you need to generate from investments by 70%. For most people side hustles are the most realistic ticket to financial freedom.
Amplify Your Side Hustle
This mental model doesn’t reflect inflation! It doesn’t reflect the active nature of some side hustles! Does that mean it’s not useful? I don’t think so.
First, the model reflects the price of freedom TODAY. If you can figure out how to make tens of thousands of dollars on the side while already working a full time job, you will figure out how to beat inflation when you don’t have a full time job. But most of all, your side hustles can likely be 10Xed.
Back to the book I mentioned writing at the beginning of the post…It’s a real-world example in how a side hustle can be leveraged in multiple ways:
- It generates sales on Amazon all on it’s own.
- After starting this blog, I wrote several articles with affiliate links to the book. Now it generates affiliate commissions.
- The increased traffic to the book from external sources seems to have tripped Amazon’s internal marketing machine to promote the book more.
- The articles potentially generate ad revenue
I am still new at this and the income I have generated from the book in the last three months time still comes to a low hourly rate. But the multiplying force of compounding and intersecting side hustles is a joy to experience. And if a product you create passively generates only $0.10 per day, the 4% rule says that’s $1,000 less that you need to invest in financial markets to have freedom. Knowing how much your side hustle is worth will keep you motivated to continue building.